BEFORE THE HOUSE WAYS & MEANS COMMITTEE
Opponent Testimony On Am. Sub. HB 58
Presented by Kathleen Hughes, Partner, Taylor, Applegate, Hughes & Associates, Ltd.
Tuesday - June 29, 2004

Chairman Kilbane and Members of the Committee,

My name is Kathleen Hughes and I am a Partner in the Certified Public Accounting Firm of Taylor, Applegate, Hughes & Associates, Ltd. located in Springfield, Ohio. I am here today as a Vice Chairman of the Ohio Chamber’s Small Business Council and as a small business owner. Our firm prepares over 150 corporate & partnership tax returns. We also prepare over 700 individual tax returns consisting of primarily Ohio residents and small business owners.

I would like to present the small business perspective on Am. Sub. HB 58, the Business Activity Tax (BAT) plan that would substantially overhaul the business tax structure in Ohio. Despite the fact that some small businesses may have a reduction in their taxes, overall, the small business community will be negatively impacted.

First, let me touch upon some positive aspects of the plan. It is very good that the business activity tax eliminates the personal property tax. The personal property tax is a burden and a disincentive to small business investing in machinery, equipment and inventory in the state. With any company that has low profit margins and a substantial investment in equipment and inventory, the personal property tax is payable whether or not the business made a profit. The ability to pay the Person Property Tax is often challenging in low profit years.

The simplicity of the BAT formula is also a positive aspect. It is not a complex calculation and is easily understood.

Now let me give you some real life examples of how the BAT would affect small businesses. At random, I took three of our firm’s clients, from three different industries, and computed their liability under the BAT and compared it to their current liability. These companies include a small manufacturing firm, a mid-size auto dealer and a small service corporation. The calculation of the manufacturing firm and auto dealer’s tax showed an increase of 100% and 4% respectively in Ohio tax liability paid by these small businesses. Neither of these clients currently has any Ohio credits; therefore, it is not the credits causing the increase, but rather the expanded base that is subject to the BAT tax.

The auto dealer’s rate of increase is primarily due to the retention of profits in the company to reinvest and pay down debt. The manufacturer’s increase is primarily caused by a current period net loss. The manufacturer’s shareholders took salaries from previous profits and paid the respective taxes on the salaries but are not granted the benefit of reduction of this tax by the loss that has been incurred. All our manufacturing clients have been financially hurt in the past two or three years and the BAT tax will again penalize them for not being profitable in Ohio.

Assuming that these companies move their payroll and facilities to a nearby state and retain the same level of sales in the state of Ohio, their Ohio tax immediately decreases. Ohio businesses pay a greater tax to the state of Ohio under the BAT tax than their non-Ohio competitors. This is a disincentive to locating in the state.

The last company, a service corporation benefits by the BAT tax. This company has a 22% decrease in total Ohio tax paid. While this company would be extremely happy with the BAT tax, its reduction in tax is at the cost of the manufacturing and retailer. The Bat tax does not fairly distribute tax liabilities across all sectors of the small business community.

Chairman Kilbane, that completes my testimony and I will be happy to answer any questions that the committee members might have.